Monday, 6 February 2017

OK, part 3—we’ve now set the scene; this is the part where the Orcs invade the Shire (I hope I have my Tolkien references correct).

I hope I’ve established so far that the economy of Georgian England was based on an amazingly complex network of personal relationships which facilitated the exchange of goods and services via sophisticated informal credit arrangements, and that one’s personal character, established by family connections, religious affiliation, or references, was a vital part of maintaining one’s connection to this network.  Given the personal nature of business, most business undertakings, as you can imagine, tended to be small, consisting of family, trusted friends, and professional relations (e.g. apprentices, connections from related businesses).  But the government recognised that some kinds of business endeavour required more capital than could easily be raised by even the richest families, and as early as Tudor times the Crown, and later Parliament, granted groups of ‘adventurers’ the privilege of limited liability and trade monopoly in exchange for financing voyages, outposts, and military and commercial personnel to establish trade with other regions.  (I hope you are all watching Taboo because it was JUST LIKE THAT.)  The efflorescence of regional trade companies in England between the seventeenth and nineteenth centuries was part of what people refer to as ‘mercantilism’, which is making profits via arbitrage—buying stuff where it’s cheap, selling it where it’s expensive, and profiting off the difference in price minus the cost of transport. 

The regional trading companies functioned pretty much as intended, bringing in lots of good stuff and making some people very rich (though of course there’s copious scholarship describing how they actually worked in practice, how their monopolies were never complete, etc.)—so well, in fact, that people recreated their business model closer to home, initially primarily in banking and insurance but also in the large-scale manufacture and trade of various products; by 1720 it’s said the capital invested in joint-stock companies was about 13% of Britain’s total wealth.  (I will note that Wikipedia, which I’ve been using to prompt my memory, suggests that this had something to do with the Industrial Revolution, but this is clearly incorrect—neither the timing nor the business sectors involved in ‘corporatisation’ would lead anyone to this conclusion.)  This phase of corporate experimentation culminated in the collapse of the South Sea Company in 1720, an event known as the South Sea Bubble, in which no less a mastermind than Sir Isaac Newton, Master of the Mint (and very good with money) lost a good part of his fortune (he never admitted how much, but people have suggested about £20,000, or £3 million in today’s money) along with lots of other suckers. 

Between the passage of the Bubble Act in 1720 and its repeal in 1825 joint-stock companies could only be formed by special act of Parliament, and Parliament was pretty stingy about these—as I mentioned before, Adam Smith opined in The Wealth of Nations that joint-stock companies, inefficient and clumsy by nature and dangerously prone to disaster, were not a good idea for anything except banking, insurance, municipal water supply and transport infrastructure, and Parliament kept pretty close to this list. Nevertheless, businesspeople either legally or extralegally continued to form corporations, with some or all of the appropriate trappings—limited liability, transferable shares, corporate action, monopoly or eminent domain—as far as I can determine, until a series of acts between 1844 and the 1860s rationalised joint-stock legislation you could pretty much get away with whatever you weren’t sued for, and courts handed down contradictory decisions about who was allowed to do what in what context.

And so, for better or worse, joint-stock companies became part of the economic landscape.  Most people thought ‘for worse’, for a few very good reasons.  In the Wealth of Nations Smith describes what came to be known as the ‘agency problem’—the fact that a joint-stock company's multiple unrelated owners were separated from its day to day management:

it cannot well be expected that [the directors] should watch over [the workings of a joint-stock company] with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. … Negligence and profusion, therefore, must always the management of the affairs of such a company.

Since joint-stock companies were managed by paid staff on behalf of owners who were both anonymous and impermanent, it was pretty soon recognised that this form of organisation ‘undermined the importance of character in business’. The absence of the social control exercised on business owners desiring to preserve their reputations in order to participate in economic life, combined with the vast resources joint-stock companies controlled and their unclear legal accountability, could lead such companies to act unethically, simply to manipulate the stock market rather than for sound business reasons. 

Examples of unethical corporate behaviour were certainly not difficult to find.  I mentioned in a previous comment that I’m currently writing about the Attwood case, which I think was one of the many wakeup calls to the business community of the time.  In 1825 the British Iron Company purchased an ironworks from John Attwood.  The following year iron prices dropped and, in an attempt to renege on the contract, three directors of the firm took Attwood to court, alleging that he had fraudulently misled them about the value of the property.  In an act of breathtaking chutzpah they declared their own agent one of the defendants, to keep him from testifying that the deal was honestly made.  The company lost their first case against Attwood in 1828 but won a second judgment against him in 1832.  Attwood petitioned the House of Lords to have his case reheard in the Court of Exchequer, and in 1838 he finally won a substantial settlement from the company, which went bankrupt shortly thereafter.  So, happy-ish ending, but what’s clear from this cautionary tale is that Attwood’s character and reputation as an honest businessman made no difference whatsoever to his treatment by the company and by the legal system.  In one of the cases I’m writing about now, reading the transcripts of people saying ‘my reputation is solid, I’ve been doing business here for years, ask anyone in Oxford’ or ‘I vouch for so-and-so as an honest man’ is downright sad, because that system of social control had already become anachronistic in the new world of anonymous contractual bureaucratic corporate management.  

I’m also writing about a series of letters between the owner of a business and three managers of a joint-stock company, in which the business owner is attempting to develop an agreement with the company after having won a series of legal cases against them establishing his right to do so.  In literally dozens of letters between him and these three guys he keeps trying, in standard socially-connected-businessman style, to work out a deal that would suit them all—he offers proposal after proposal and concession after concession, and the three company dudes literally ignore it, as they have no interest whatsoever in making a deal with him.  They obfuscate in boilerplate bureaucratic babble, and play him off against each other (‘good cop’, ‘bad cop’, and ‘unintelligible cop’).  He eventually had to take them back to court—he won, again, but was never able to achieve a mutually-beneficial deal with them; he eventually buckled under and became an agent for the company.

Parliament and the courts generally agreed that ‘public’ (i.e. created by the state) joint-stock companies should not be permitted to participate in the ‘private enterprise’ of the general domestic economy; Parliament generally declined to authorise companies that might 'carry on any ordinary trade or calling carried on in this country' or compete with existing family businesses.  So what happened?  How did the joint-stock company get so out of control, even though people were well aware of its problems, no one wanted them anywhere they didn’t belong, and Parliament did its best to keep close control of them?  Well, it was probably inevitable given the vast amounts of capital and resources these entities possessed, but I personally think it was one specific thing.  

I mentioned in an earlier post that we now take for granted something that is actually extremely weird; most of the time when we buy things from people we’re not exchanging our money for their stuff or services—we’re giving our money to a fictional legal entity, which somehow employs people to make and sell things we buy.  I realised that the first time in history that this ever happened to any great extent was with the railway companies—when someone went to the station to buy a ticket to visit their aunt in Scarborough that was the first time most individual people had ever had a direct economic interaction with a corporation.  Parliament had originally authorised the first railway companies as joint-stock companies within Smith’s categorisation of transport infrastructure…but, to everyone’s surprise, including the companies themselves, these companies ended up not just building and maintaining infrastructure but operating a huge and diversified passenger and goods transport business within the existing domestic economy.  In my opinion it was the railway companies’ ‘scope creep’ into the sphere of ‘private enterprise’, combined with their command of enormous resources, personal connections within government, and utter disregard for business norms, that broke the dam and allowed corporations to rule the world.


For further reading on this whole sad story I recommend James Taylor’s Creating Capitalism—valuable insight into people’s attitudes and arguments at the time, and his take on what happened and why.  As I said before, I don’t think our explanations are incompatible, and I’m drawing on his ideas.


  1. Once again that was fascinating. I'm learning so much. It's particularly enjoyable for me because it puts so much of what I do on a day to day basis in context. And a lot of what you write really resonates (I'm embroiled in something now that's a nightmare because the directors are also the shareholders, they've had a row, and it get really complicated working out what actions they can bring against each other depending whether they've got their director or shareholder hat on)

    It's also funny how hard it used to be to set up a company. I have to do that a lot (we use 'single purpose vehicles' now for just about every separate contract, even between the same parties). My record for incorporating a company is 8 minutes from the time I was asked to, to submitting the application. Companies House emailed the incorporation certificate 2 hours later. How times change eh?

    Oh and with the Attwood case the appeal route may seem a bit weird. That's because prior to 1873 not only did we have two parallel legal systems in England we also had two separate court systems. We still have the two legal systems but you can use the same court for either.

  2. I honestly think we'd all be better off if we acknowledged incorporation as a privilege not a right--incorporation is a government-granted set of special rights for investors that should only be granted if these investors acknowledge their part of the bargain, which is to provide something in the public benefit. There were several American groups advocating for stronger controls over incorporation and for revoking the charters of corporations that don't benefit the public, but I haven't heard anything about this recently. A couple of additional references on corporate structure and behaviour:

    Thom Hartmann on corporate personhood:

    Corporations are not legally required to maximise shareholder profit:

    Re the Victorian legal system--I shouldn't admit this, but I've pretty much given up trying to figure out who's supposed to do what. I do have a chart around here somewhere which some well intentioned person made to try to explain to me equity courts and whatever (I needed to know this to follow the plot in Iolanthe) but I've pretty much forgotten it....

  3. It's funny how often a knowledge of the legal system assists with fiction. My land law tutor explained everything through the works of Jane Austen. Which are themselves a commentary on the social situation that led to The Married Women's Property Act.

    She was a great tutor. She used to mark our essays with those different coloured stars. I got a gold one once and I was so chuffed.

    I rely on Equity a lot. I mentioned about my client base's inability to record any agreements. Under English common law all property transactions are only valid if recorded in writing, so I always end up having to go down the equity route (where such transactions don't).

    Corporate personhood crops up a lot in criminal law. Especially with health and safety offences. You may be familiar with the concept of mens rea. Basically the state of mind that must be established as part of an offence. That's quite tricky with a non human consciousness. So now we have things like the Corporate Manslaughter Act to make it simpler (and environmental offences tend to be 'strict liability' now so you don't need to prove a company 'intended' to do something)

    The 'social benefit' aspect is something now reflected in the creation of 'Community Interest Companies'. (I'm actually a director of one for our fitness sideline). They have to be for a social purpose and there are (pretty slack) limitations on director's salaries and dividends. In practice the only reason for going down that route is to make a bit of a statement (although it can open up certain funding and tendering opportunities that might not otherwise be available). But really it's just the virtue signalling thing.

  4. Still very interesting. I don't have the kind of comments Alan does, but I wonder how much of the disconnect we sometimes have in our current day business transactions still relates to this idea that we should be able to be seen as good and worthy participants in a system that doesn't really care if we are or not.

    1. That's an interesting way to look at it--thanks. I wrote a piece years ago, no longer online, about how we no longer get the social/emotional reward from our work that we still, maybe unconsciously, expect to get--so I suspect you're right, about our economic interactions in general, not just our employment. I know that even aside from getting better and fresher food I enjoy the experience of interacting with the people at the farmers' market that grow and process the food I buy from them--and now that you're pointing this out, part of it is acknowledging and expressing my gratitude to them for making things that are of so much value to thanks for enriching my mental life today!

  5. I wonder if this is related to the phenomenon of personifying corporate images. Either with a quasi real figure like colonel sanders or entirely fictitious ones like aunt bessie or uncle Ben (Hmm, just spotted the friendly family figure thing there). But in the UK it's pretty common for even large brands to now emphasise that they're a family firm for instance and you get the actual bosses appearing in the adverts now.

  6. Ooh, just remembered Victor "I liked it so much I bought the company" Kiam.

  7. Oh absolutely--that's one reason why I want more people to understand this particular facet of economic history--to realise how important and emotionally/culturally powerful it still is, even when just used as a marketing ploy. Nobody wants to engage with a corporation--we all want to engage with a person.

    I read a fantastic study a few years ago illustrating the different facets of this particular 'personalising' marketing practice, using iirc Land's End as one example, where you 'meet Jenny, she sewed your shirt', and some gardening equipment company as another, where 'these things are made by precision craftsmen, like Jason'--there was a third example, of 'meet Joseph who picked your coffee beans' (or something)--but yes, the intent of all three of these styles of marketing was to develop and exploit some kind of human connection between the people who grow/make stuff and the people who buy it, eliding the corporation in between.

  8. Marshall amplifiers are perhaps another example. Obviously the logo is Jim.Marshall's signature. But also each amp is signed by whoever built it. That's now a bit of a gimmick but it started off as a genuine quality control thing.

    1. :) I don't spend much time buying amplifiers, but I am a pretty regular customer of LUSH, and all their stuff has a sticker saying who made it.

  9. Heh, I've always been too busy asking "But why would you put glitter in soap?" to have ever noticed that.

  10. Given one of your jobs, you might get a laugh out of this--I love glitter in soap! and in bath bombs as well. Back in the day I used to pretty regularly use a particular bath bomb that had glitter in it. I auditioned for and got a role in an opera being put on by a major company. We had weeks and weeks of rehearsals in the rehearsal space, then went to practice on the real stage--while we rehearsed, the tech crew worked on setting up their lighting, cues, etc. etc. The first time I came onstage the lighting director flipped the hell out--as I was covered with microscopic glitter which completely messed up his work. So I was very forcefully told that if I wanted to keep my job I would need to stop using my favourite bath bombs. Well ok then.... Since then I never really got back into the habit of using glitter stuff.....

  11. Heh, that sounds so familiar. I've known many a lighting designer having a fit because someone wore a shiny belt buckle or something "You never wore that in rehearsals!"

    That's cool you do opera though. We often swap roadie stories and whinge about difficult productions. But the opera guys can always top us "Yeah, you ever had to get a team of horses onto a revolve?"

    The glitter thing brought back memories though. You know I do that Krav thing? A TV programme wanted to film us for something. At the time we used to use a place called Turnmills for training. That's a gay nightclub. On the day of filming there'd been some big party the night before. There was loads of glitter on the floor. We'd all dressed in tactical black to look suitably macho. But after rolling around on the ground for a bit we all got very sparkly. Add that to the huge statues of naked Spartans in the background and we looked positively fabulous! :-)

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